Six myths about client agency contracts

The core of a transparent financial relationship between an advertiser and its media agency is a well-thought-out contract. In practice, a detailed contract does not always guarantee the required or desired level of transparency on the part of the agency. Here we bust six pervasive myths about contracts.

Myth number 1. Everybody reads the contract

Most global contracts are more than 50 pages long. For the most part, a contract contains all the excitement of an end user license agreement (EULA), but with much more verbiage. The levels of jargon and legalese are sky high, and they’re not exactly page-turners.

Everyone reading this blog has signed off on a EULA – just think Apple iTunes or Microsoft Office. As a refresher, a EULA is a document all users agree to in order to use applications and software. And just like a EULA, the next question about an agency contract is “Has anyone read it in its entirety?” The answer to both is a predictable and resounding “No!”.

This concern is compounded by the fact that local agencies that are part of global networks manage at least five such agreements for their roster of global clients. What’s more, these agreements are often in a language – typically English – that is foreign to the local market.

Put it this way: have you ever read a EULA you have signed off on, and would you be more likely to read if it were in a foreign language?

So, it’s very unlikely that anyone outside of the client’s and agency’s HQ legal departments ever read the final versions of contracts, end to end. As a result, many of the agency’s contractual obligations remain unfulfilled because local agency and client personnel are unaware of their obligations.

Myth number 2. The global agreement is the final agreement

Many global agreements allow for local agreements to be brokered, to allow partnerships to adapt to local market conditions. Governed by the global agreement, any local counterpart should carry the formality of a legal document and be approved by the client’s regional or global management. In practice, an email chain between the local client and agency – perhaps supported by a set of slides – are the tools most commonly used to document alterations to the global agreement. There is often no recorded approval from client headquarters for these modifications, nor, indeed, is there any formality to the process. While the email chain may provide evidence of negotiations, the correspondence is often inconclusive and frequently lacks any oversight from HQ.

Myth Number 3. The global agreement applies to all markets

Despite the global contract stating that it covers all markets, it is common for individual markets to claim that some clauses in the global agreement were never intended to apply to them. Unfortunately, that position is rarely documented in any kind of local addendum. This omission can affect the remuneration the advertiser pays the agency.

For example, we often see parts of the same agency group treat commissions paid by media providers to agencies inconsistently. Typically, all markets will agree that commission should be returned to client. However, one market will claim local practice dictates commission should be applied to reduce the cost of media for the purposes of calculating the media fee and media effectiveness. Meanwhile, another market will state that local practice declares commission to be irrelevant when calculating the agency mark-up cost base or cost effectiveness. At the same time, the contract is clear in stating that commission paid by the provider should reduce the agency mark-up cost basis. This kind of confusion and contradiction rarely has a good outcome.

Myth number 4. Contracts are administered globally

Clients may be under the misapprehension that, since the agency’s HQ negotiated the global agreement, it is the agency’s HQ that is responsible for ensuring compliance to the contract. While HQ may have checklists for its local offices to follow, our experience has shown us that it’s highly unlikely the agency has a program to assess compliance with the global agreement.

It should be noted that such a program, unless specified in the global agreement, is not an obligation of the agency. So, the calculation of local agency fees and agency volume bonus rebates may not have the oversight assumed by the client. Often, an informal agency compliance program is started when an external compliance audit is conducted by the client.

Myth Number 5. Contract compliance starts with the “effective date”

The effective date of a contract usually aligns with the start date of the contract. Unfortunately, the effective date and the date that the contract is actually signed by both parties can be nine months apart or more. Our experience has been that the gap between the effective date and the signature date presents a high level of risk in terms of compliance. It is rare for either the client or the agency to go back to the effective date to ensure contract compliance.

Myth Number 6. Out of scope work is truly out of scope

Most contracts state that out of scope work is subject to separate fee negotiations and not covered by the terms of the main agreement. The challenge here is to make sure that the contract’s scope of work is clearly defined, making out-of-scope fees unnecessary. Common out-of-scope fees – which often fall under the main contract – are competitive market study fees and internal studio fees.

So, in summary, to prevent their business falling foul of these widely-held myths, advertisers need to ensure that global contracts are administered globally. And of course (we would say this wouldn’t we) an integral part of effective global contract management requires agencies to be formally audited for contract compliance, periodically. That’s because, without evidence of reality, the global contract – just like Bigfoot or the Loch Ness monster – is just a myth.

About Author

Tony has had CFO level experience at Y&R and Wunderman in Latin America. Tony also has 10 years’ experience as an Internal Auditor with JWT Group and Y&R Inc. Tony was running an agency group within Brazil prior to joining FirmDecisions in 2004 and is responsible for running the company’s business and managing client audits and client relationships in Latin America since.